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The Taylor Rule: A Useful Monetary Policy Benchmark for the Euro Area?[Note 1. We thank Shamik Dhar, Giorgia Giovanetti, Adam Posen, Lars ...]
Author(s) -
Peersman Gert,
Smets Frank
Publication year - 1999
Publication title -
international finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.458
H-Index - 39
eISSN - 1468-2362
pISSN - 1367-0271
DOI - 10.1111/1468-2362.00020
Subject(s) - taylor rule , output gap , economics , monetary policy , benchmark (surveying) , robustness (evolution) , inflation (cosmology) , econometrics , inflation targeting , macroeconomics , central bank , geography , biochemistry , chemistry , physics , geodesy , theoretical physics , gene
This paper explores the Taylor rule – defined as an instrument rule linking the central bank's policy rate to the current inflation rate and the output gap – as a benchmark for analysing monetary policy in the euro area. First, it analyses the stabilization properties of the Taylor rule in a closed economy model of the euro area, estimated using aggregate data from five EU countries. An optimized Taylor rule performs quite well compared to the unconstrained optimal feedback rule. Second, the robustness of these results to estimation error in the output gap and model uncertainty is examined